November 14, 2014
Bethany McLean goes a bit overboard in arguing against refinancing in a NYT column this morning. She cites data showing that the vast majority of subprime loans in the bubble years were for refinancing homes rather than home purchases.
The data are misleading because many of the subprime loans were issued to be refinanced. Many of these loans carried teaser rates and were pushed with the promise that people could refinance before the teaser rate reset. Many buyers took advantage of this option, often refinancing two or three times as house prices continued to rise. For this reason, it is misleading to imply that subprime loans were not important to home purchases during this period.
The piece also carries the bizarre assertion:
“Mr. Rosner [Joshua Rosner, a managing director at the research consultancy Graham Fisher & Company] also points out that while homeownership peaked in 2004, home prices peaked in 2006, because refinancing drove up prices.”
This doesn’t make any sense. Refinancing a home cannot drive up its price. The bubble was driven by demand for homes, not the demand for refinancing. The latter can plausibly drive up the price of mortgages, but it doesn’t directly affect house prices. (Higher mortgages rates would be expected to lower prices, other things equal.)
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